Common Financial Planning Mistakes

One of the many reasons Bill and I founded Rightirement Wealth Partners is to share valuable knowledge with as many people we can reach. Blogging is a natural extension of this goal and what better way to begin than by sharing some of the common financial planning mistakes. If some of these hit home and you’re a person who is more comfortable working through problems as a team reach out to us for a complimentary 15-minute phone consultation.

Failing to review your corporate benefits package in its entirety. Many of the significant money saving opportunities we discover for our clients comes from simply reading all their benefit plan documents. It’s true, these documents are bland and feel like a chore to read however they are chock full of financial opportunities. Many plan documents are summarized up front and then detailed out in the back. At the very least, read that summary.

Some common overlooked savings opportunities are inefficient use or lack of use of Flexible Spending Accounts, Health Savings Accounts, and pre-tax transit programs, such as TransitChek. Some overspending can occur if paying for accidental death and dismemberment insurance, carrying vision coverage on family members who have no eyesight issues. We also see people take supplemental life insurance coverage without comparing the rates against the cost of a matching private life insurance policy.

Never writing down a budget. The word ‘budget’ for many people is similar to the word ‘diet.’ It means painful restriction from fun and enjoyment of life. However, the original definition of diet was only “the kinds of food that a person habitually eats.” It was non-judgmental. By extension ‘budget’ is an estimate of income and expenditure for a set period of time. It’s non-judgmental! Take a short amount of time to write down what you spend each month. Chances are you can document 80% of it right off the top of your head. Perhaps you will surprise yourself and may even want to make a change. Bill and I both recently modified our cable and mobile phone bills just to save some previously wasted dollars. It didn’t hurt at all, in fact it felt good.

Don’t forget to write down those expenses that you only pay a few times a year, such as auto & home/renter’s insurance and holiday and birthday gifts. We have seen many people share with us that the credit card buildup from the holidays is what that tax return is for. It’s a strategy that works, but the better one is to plan for it ahead of time. Writing it out, helps you work it out, and pretty soon savings becomes a fun game rather than a fear or a chore.

Sitting on too much cash. Bill is Italian and he swears to me that cash hording is in the Italian blood. Don’t get me wrong, cash is and always will be king. The best investments at some point need to be sold to raise cash for a goal or opportunity. However, opportunity cost can be quite expensive as well. If you have a reasonable cash reserve of 3-6 months of your bills set aside, then you should be investing surplus. If you are conservative investing may be a certificate of deposit or a ‘high-yield savings’ account that generates more than the 0.10% interest (or less!) that many banks will pay street level customers. If you have a longer term goal and do not mind some fluctuation, then you can consider bonds or stocks or other investments. The point remains that given a reasonable amount of time you can probably have your money work for you.

Not coordinating investments with your spouse. I’ve caught the tail end of the time when one spouse traditionally handled the money. Bill has mostly worked with clients where each spouse does their own investing and has separate checking and savings accounts. Whatever way you want to work it is fine. What consistently surprises me is the vast majority of new clients we see are working toward the same financial goals together, but they have never compared their investment accounts to see if their investment plans are targeting their financial goals. Often we see spouses who have opposing comforts around stocks and retirement accounts will reflect it. One spouse will be full stock in the 401(k) and the other spouse will be in a fixed account. Combined they have little idea what their expected investment return range might be, and worse planning for future goals is hit or miss when they lack a target.

The common thought that having a mortgage is good because the interest is deductible. It’s true that few people have the resources to easily pay off their mortgages quickly, but a few simple practices can accelerate the pay down. What amazes me is the percentage of people I have met throughout my career that believe that it is in their best interests to maintain a mortgage balance even if financially they can afford to pay it down or off. Simply put, paying interest to a bank costs money. No matter the deduction for said interest it only represents a percentage of the interest paid out. Sure, in this low interest rate environment there can be an argument of opportunity cost if cash were invested instead of paid to debt service. Regardless, it is simply false that maintaining a mortgage balance for the interest deduction is a financially positive decision.

Believing that saving enough in your retirement plan to get the match is sufficient to prepare for financial independence later. Please understand that 401(k)s were not designed with the employees’ best interests in mind. They were created to transfer the financial responsibility of retirement income away from the company and toward the employee thereby saving the employer cost. Logically, the 401(k) match you may receive has not been designed to fund your retirement. A minimum target for retirement savings is 10% of earnings. A common match percentage from an employer is 3%. That is not even a third of this minimum goal. I personally advocate for a 20% savings rate. If you can’t reach this goal, then having a plan to move toward it is in your interests. Just know that most of your retirement savings will come from your efforts.

One Million Dollars of life insurance is enough. Ok, it could be. It also may not be. When we work through protection planning with our clients who have children still in grade school, more often than not we find that more insurance is needed. A lot of people still believe that one million dollars is a lot of money. A general rule of financial planning is that 4% is a reasonable withdrawal rate from a lump sum of money to have it last decades. Using that rule a $1,000,000 lump sum could provide an income of $40,000. If you live in New York like we do, after income tax, that amount isn’t going to cover all the bills. It is unlikely to allow for retirement savings for a surviving spouse. It does not provide a sufficient lump sum to carve off for college tuition. Each family has different needs, and we help them calculate what an optimal amount of life insurance is. Take a moment to consider whether your life insurance will help your family complete the goals you have now.

Disability insurance is a scam to earn insurance commissions. I have only had one client go on long-term disability claim and sadly she succumbed to cancer. I have had clients hire us after a disability. None of those families would say they wish they had less disability insurance. Few of them had adequate coverage. If you plan ahead you can save a sufficient cash reserve to last multiple years without earned income, but few people do this and realistically it doesn’t make a lot of sense if the goal is to avoid paying an insurance premium. Perhaps it was a simply a sales tactic taught to me by a veteran when I was a rookie financial planner but it holds true. Paying a premium of about 1% of your income to ensure that you can protect the rest of your after-tax income if you are hurt or sick and out of work makes sense. Most people already do this to protect their home, their cars, and their life. It’s likely that your biggest asset is your ability to earn an income for decades of your life. If that fails, most of your family’s financial goals will too. A competent financial planner can determine your needs and then from a position of knowledge you can choose whether you will insure your income.

Believing estate planning is only for the really wealthy. An estate is all the money and property owned by a person at death. Estate planning is a fancy term for planning ahead of time what you would like to happen with your money and property. I can tell you what you do not want happening with your money and property; your family having to figure it out through the courts unnecessarily. On average I work through 3 or 4 estates with clients annually. Usually it is an elderly parent who passes away, but I have helped on estates of much younger people. People who pass without a will leave a mess for the surviving family members. If you pass away without a will when your children are in their prime working years, the time commitment necessary to finalize an estate is a burden. Fortunately, I have not experienced two parents dying with surviving grade school children. It is very important for parents that they not only have wills, but also guardianship provisions and custodians named in the event of a tragedy. I have only been able to identify two reasons people do not write out an estate plan; cost and fear of discussing one’s own mortality. I do not have an easy solution for the latter, however I assure you the cost associated with preparing an estate plan is peanuts compared to the costs of not having one if you need it.

If you would like additional information on any of the above topics, please email or call us. Sure we would welcome new clientele that fits our business, but we write this blog with the hopes that we can help many more people than we could reasonably help individually. If possible we will help you locate a professional in your area who can help too.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above.

They generally should be part of a diversified portfolio for sophisticated investors.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.